Practical Law

Think of a payment dispute under a construction contract and you usually think about adjudication. After all, it has become the method of choice for resolving construction disputes and was introduced primarily to deal with cash flow, often referred to as the lifeblood of our industry.

Therefore, in Volkerlaser Ltd v Nottingham City Council, I was a little surprised to see an unpaid contractor adopt a slightly different tactic, preferring instead to start court proceedings (presumably under CPR 7) and then apply for summary judgment on sums set out in its interim application for payment, and for which no payment or pay less notice had been served. 

Volkerlaser Ltd v Nottingham City Council

Volkerlaser was appointed by the council to supply and install wall and loft insulation to properties on a number of the council’s housing estates. The parties entered into a partnering agreement, based on the ACA’s Standard Form of Contract for Term Partnering 2005, amended in 2008 (TPC 2005). The agreement was dated October 2013 and was due to run until March 2015, although it seems work continued into June 2015.

In October 2015, Volkerlaser alleged the council was in breach of contract by not releasing certain properties to it. This led to a claim for some £189,000. It also argued (in the alternative) that there was a change (or variation) under clause 8.3 of the contract. Volkerlaser subsequently issued its valuation 12, which included the £189,000 and also a claim for £1.13 million for “additional costs” because of the clause 8.3 change. Volkerlaser’s interim application 13 (IA 13) was issued in December 2015. These two sums were included in the £1.968 million set out in IA 13.

The parties’ contract included a bespoke payment clause (clause 7), which provided that:

• The council’s representative would issue a payment notice within five days of receiving an application for payment (clause 7.4).
• The council would pay the amount set out in the payment notice within 30 days of the due date for payment or within 30 days of a VAT invoice (which ever was the later), and that date would be the final date for payment (clause 7.6).
• A pay less notice could be given no later than two working days before the final date for payment (clause 7.8).

The clause also made provision for a contractor’s default payment notice (clause 7.7) and the contractor’s final account (clause 7.14).

Issues before the court

In a detailed judgment, Edwards-Stuart J considered a number of issues before concluding that the summary judgment application should fail and the council should be given leave to defend the claim:

• Monthly applications had to be made at the end of a month during which Volkerlaser had either commenced or completed a “task” (“tasks” were defined as meaning the works or services to be carried out under the contract). No work was carried out after about 5 June, so this meant IA 13 was not a valid application.
• Detailed provisions were included for how changes under clause 8.3 should be dealt with. This clause was a “self-contained machinery” that could operate in parallel with the interim payment regime. When read together, clauses 7.3 and 8.3 complied with the Construction Act 1996.
• Volkerlaser could have included its claims for changes in its monthly applications for payment. It should not have saved up those claims and applied for them several months after the contract term had expired.
• Obiter, the court held that IA 13 was valid insofar as Volkerlaser was entitled to include its claims for changes (under clause 8.3) provided the application complied with clause 7.3, which it did.
• The court noted that the final date for payment was “rather more elusive” because of the need for a payment notice and the requirement for a VAT invoice. However, Volkerlaser had not issued a VAT invoice.

Summary judgment

As I said at the start, I was a little surprised to see that Volkerlaser had gone down the court route, rather than starting an adjudication. The judgment doesn’t provide us with any clues as to why either, or even mention whether the parties had complied with the construction pre-action protocol. However, that is often sufficient reason to put-off parties who can simply adjudicate their dispute.

The main reason for my surprise is simply that when you look at how the courts approach adjudication enforcement, provided the adjudicator had jurisdiction to decide the dispute (and didn’t breach the rules of natural justice), it wouldn’t matter if the adjudicator made a mistake. Adjudicators have considerable leeway when it comes to making decisions, and so it is arguable that a court would still have enforced that decision.

On the other hand, I know we are starting to see parties apply for declaratory relief under CPR 8 in defence of adjudication enforcement proceedings, asking the court to make final and binding determinations on the meaning of contract provisions and the like, and so it is arguable that the outcome for these parties would, ultimately, have been the same.

The other reason I was surprised about a summary judgment application is simply the test that is applied in summary judgment applications. Under CPR 24.2, the court may give summary judgment on a claim or a particular issue if:

• The party has no real prospect of succeeding on or defending the claim (CPR 24.2(a)).
• There is no other compelling reason why the case or issue should be disposed of at a trial (CPR 24.2(b)).

As I understand it, the key is for the court to determine whether the case, as pleaded, has a real prospect of success. When looking at what is meant by “real”, the court will look for more than an arguable case, more than something that has a “fanciful chance of winning”.

Perhaps Volkerlaser genuinely thought that the lack of a pay less notice would mean there was no defence to its claims in IA 13, that this was a “slam dunk” or a smash and grab in adjudication speak. However, given the way case law relating to payment disputes has developed over the last 12 months, it is arguable that the odds of the court agreeing weren’t particularly favourable.

Personally, I would prefer to take my chances via the adjudicator route.

and finally…

Over the last couple of years, we have seen a number of payment cases where the court has looked at the validity of the contractor’s application for payment. Here, the court considered the meaning of “at the end of each calendar month” in clause 7.3 and concluded that this did not mean the contractor had to submit its application on the last working day of each month, but “within three or four working days”. This was, of course, subject to how the parties had submitted and accepted monthly applications previously and whether strict compliance with the procedure had been waived. We saw something similar in Leeds City Council v Waco UK Ltd, which was also an Edwards-Stuart J judgment.